Is Principal Reduction by the Banks a Good Thing?

According to its March 24th press release, Bank of America promised to first consider principal forgiveness before interest rate reduction for mortgages that qualify for their National Homeownership Retention Program (NHRP), "including the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater."

The New York Times then reported that the Obama administration announced that one of the new provisions of their plan to prevent a future wave of foreclosures will be to encourage banks to reduce the principle balance on underwater loans in default.

Then the stated that the word "encourage" may be too light of a word when it comes to the unemployed. There is a push by the Obama Administration to require banks and other lenders to "cut underwater mortgage payments to no more than 31 percent of a borrower's income if they have been unemployed for three to six months, and in some cases, allow payments to be skipped all together." 

Is reducing loan principals and interest rates really the solution to the housing crisis? 

The root problem with the housing crisis, in my opinion, is lack of jobs.  Unemployment has hovered around double digits for around a year now (real unemployment around 20%) and the 8 million plus jobs lost, according to the Obama Administration, aren’t coming back anytime soon.  The private sector isn’t growing any jobs and quite frankly, with more taxes, healthcare requirements, and administrative burdens being levied against businesses, don’t expect the private sector to produce jobs any time soon.

Is the solution to force banks to restructure loan principal and interest rates to those in distress the proper response to this crisis?  In my opinion, this option will not solve the problem. 

CNNMoney.com reports that 75% of modified loans are projected back into default.  Home prices are still dropping despite mortgages being at an all time loan.  Home sales have dropped significantly since the homebuyer tax credit expired.  Despite all of the trillions being thrown into this industry, the problems still persist.  CNNMoney.com reports that 75% of modified loans are projected back into default.  Home prices are still dropping despite mortgages being at an all time loan.  Home sales have dropped significantly since the homebuyer tax credit expired.  Despite all of the trillions being thrown into this industry, the problems still persist. 

The fact is that reducing expenses does the homeowner no good if they don’t have income!

In my opinion, I believe this suggestion is just political rhetoric from a President pandering for votes to a scared and desperate portion of the population.   After all, if you don’t vote for him, you may have to go back to finding a job and paying bills again!  Giving trillions to the banking institutions that created this problem and asking them to solve it with absolutely no oversight or accountability on how the money is spent is a huge gift for the large banks, and I am confident they will return the favor to the President in the November 2012 elections.

The housing crisis, the spending crisis, the credit crisis, all these crises will fix themselves when the unemployment rate is reduced.  And until the Republicans and Democrats begin focusing on solutions and incentives for businesses in the U.S. to hire again, then these crises will continue.